UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number: 000-23157
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A.C. MOORE ARTS & CRAFTS, INC.
------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 22-3527763
------------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 University Court, Blackwood, NJ 08012
-----------------------------------------
(Address of principal executive offices)
(Zip Code)
(856) 228-6700
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at August 8, 2002
----- -----------------------------
Common Stock, no par value 18,736,370
A.C. MOORE ARTS & CRAFTS, INC.
TABLE OF CONTENTS
Page
Number
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 30, 2002
and December 31, 2001 3
Consolidated Statements of Income for the three
and six month periods ended June 30, 2002 and 2001 4
Consolidated Statements of Cash Flows for the six
month periods ended June 30, 2002 and 2001 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 11
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Use of Proceeds 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
2
A.C. MOORE ARTS & CRAFTS, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
June 30, December 31,
2002 2001
-------------- ---------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 47,118 $ 10,818
Inventories 94,473 85,674
Prepaid expenses and other current assets 2,300 1,526
-------------- ---------------
143,891 98,018
Property and equipment, net 27,008 24,969
Other assets 808 824
-------------- ---------------
$ 171,707 $ 123,811
============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital leases $ 1,329 $ 1,329
Trade accounts payable 22,606 23,322
Accrued payroll and payroll taxes 3,943 5,098
Accrued expenses 6,248 7,247
Income taxes payable 920 4,600
-------------- ---------------
35,046 41,596
-------------- ---------------
Long-term liabilities:
Capitalized equipment leases, less current portion 1,201 1,845
Deferred tax liability 3,425 3,427
Other long-term liabilities 3,566 3,216
-------------- ---------------
8,192 8,488
-------------- ---------------
43,238 50,084
-------------- ---------------
SHAREHOLDERS' EQUITY
Preferred stock, no par value, 10,000,000
shares authorized, none issued
Common stock, no par value, 40,000,000 shares
authorized, 18,723,670 shares outstanding at June 30,
2002 and 14,932,012 outstanding at December 31, 2001 97,088 43,807
Retained earnings 31,381 29,920
-------------- ---------------
128,469 73,727
-------------- ---------------
$ 171,707 $ 123,811
============== ===============
See accompanying notes to financial statements
3
A.C. MOORE ARTS & CRAFTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
(unaudited)
Three months ended Six months ended
June 30, June 30,
------------------------------ -------------------------------
2002 2001 2002 2001
------------- -------------- -------------- --------------
Net sales $ 82,866 $ 67,132 $ 168,719 $ 133,555
Cost of sales (including buying and
distribution costs) 52,170 42,265 106,332 84,243
------------- -------------- -------------- --------------
Gross margin 30,696 24,867 62,387 49,312
Selling, general and administrative expenses 29,514 24,718 59,099 48,157
Pre-opening expenses 384 374 1,038 1,449
------------- -------------- -------------- --------------
Income (loss) from operations 798 (225) 2,250 (294)
Net interest expense (income) (187) 149 (176) 181
------------- -------------- -------------- --------------
Income (loss) before income taxes 985 (374) 2,426 (475)
Income tax expense (benefit) 401 (142) 966 (181)
------------- -------------- -------------- --------------
Net income (loss) $ 584 $ (232) $ 1,460 $ (294)
============= ============== ============== ==============
Basic net income (loss) per share $ 0.03 $ (0.02) $ 0.09 $ (0.02)
============= ============== ============== ==============
Weighted average shares outstanding 18,682,222 14,857,666 17,083,448 14,849,238
============= ============== ============== ==============
Diluted net income (loss) per share $ 0.03 $ (0.02) $ 0.08 $ (0.02)
============= ============== ============== ==============
Weighted average shares outstanding
plus impact of stock options 19,779,186 14,857,666 18,134,658 14,849,238
============= ============== ============== ==============
See accompanying notes to financial statements
4
A.C. MOORE ARTS & CRAFTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
Six Months Ended
June 30,
--------------------------------
2002 2001
-------------- --------------
Cash flows from operating activities:
Net Income (loss) $ 1,460 $ (294)
Adjustments to reconcile net income (loss) to net cash
(used in) operating activities:
Depreciation and amortization 2,968 2,357
Compensation expense related to stock options - -
Changes in assets and liabilities:
Inventories (8,799) (10,135)
Prepaid expenses and other current assets (774) (264)
Accounts payable, accrued payroll
payroll taxes and accrued expenses (2,870) (10,371)
Income taxes payable (3,680) (3,115)
Other long-term liabilities 350 264
Other 16 (72)
-------------- --------------
Net cash (used in) operating activities (11,329) (21,630)
-------------- --------------
Cash flows (used in) investing activities: Capital expenditures (5,008) (4,840)
-------------- --------------
Cash flows from financing activities:
Proceeds from sale of shares 52,130 -
Proceeds from line of credit 2,000 17,500
Repayment of line of credit (2,000) -
Exercise of stock options 1,151 77
Proceeds from capital leases - 2,791
Payment of capital leases (644) (192)
-------------- --------------
Net cash provided by financing activities 52,637 20,176
-------------- --------------
Net increase (decrease) in cash 36,300 (6,294)
Cash and cash equivalents at beginning of period 10,818 10,310
-------------- --------------
Cash and cash equivalents at end of period $ 47,118 $ 4,016
============== ==============
See accompanying notes to financial statements
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Basis of Presentation
The consolidated financial statements included herein include the accounts of
A.C. Moore Arts & Crafts, Inc. and its wholly owned subsidiaries (collectively
the "Company"). The Company is a chain of 65 retail stores selling arts and
crafts merchandise. The stores are located throughout the Eastern United States.
These financial statements have been prepared by management without audit and
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2001. Due to the seasonality of the Company's business, the
results for the interim periods are not necessarily indicative of the results
for the year. The accompanying consolidated financial statements reflect, in the
opinion of management, all adjustments necessary for a fair presentation of the
interim financial statements. In the opinion of management, all such adjustments
are of a normal and recurring nature.
(2) Common Stock and Earnings per Share
On June 25, 2002, the Company's Board of Directors declared a two-for-one stock
split to stockholders of record as of the close of business on July 15, 2002
payable on July 31, 2002. All references to the number of shares of common
stock, per share prices and earnings per share amounts in the consolidated
financial statements and accompanying notes included in this Quarterly Report on
Form 10-Q have been adjusted to reflect the split on a retroactive basis.
The weighted average shares outstanding plus impact of stock options for the
three and six month periods ended June 30, 2001 excludes potentially dilutive
shares as the result would be antidilutive.
(3) Management Estimates
The preparation of these consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of expenses during
the reported period and related disclosures. Significant estimates made as of
and for the three and six month periods ended June 30, 2002 and 2001 include
provisions for shrinkage, capitalized buying, warehousing and distribution costs
related to inventory and markdowns of merchandise inventories. Actual results
could differ materially from those estimates.
(4) Recent Accounting Pronouncements
Statement No. 143, "Accounting for Asset Retirement Obligations" requires the
recognition of a liability for the estimated cost of disposal as part of the
initial cost of a long-lived asset. We must adopt Statement No. 143 in 2003. We
believe that adopting this pronouncement will not have a material impact on our
consolidated results of operation, financial position or cash flows.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis contains certain forward-looking
statements. These forward-looking statements do not constitute historical facts
and involve risks and uncertainties. Actual results could differ materially from
those referred to in the forward-looking statements due to a number of factors,
including, but not limited to, the following: customer demand, the effect of
economic conditions, the impact of competitors' locations or pricing, the
availability of acceptable real estate locations for new stores, difficulties
with respect to new information system technologies, supply constraints or
difficulties, the effectiveness of advertising strategies and the ability to
meet capital needs. For additional information concerning factors that could
cause actual results to differ materially from the information contained herein,
reference is made to the information under the heading "Cautionary Statement
Relating to Forward Looking Statements" in the Company's Annual Report on Form
10-K as filed with the Securities and Exchange Commission.
Due to the importance of our peak selling season, which includes Fall/Halloween,
Thanksgiving and Christmas, the fourth quarter has historically contributed, and
the Company expects it will continue to contribute, disproportionately to the
Company's profitability for the entire year. As a result, the Company's
quarterly results of operations may fluctuate. In addition, results of a period
shorter than a full year may not be indicative of results expected for the
entire year.
Our quarterly results of operations also may fluctuate based upon such factors
as the length of holiday seasons, the date on which holidays fall, the number
and timing of new store openings, the amount of store pre-opening expenses, the
amount of net sales contributed by new and existing stores, the mix of products
sold, the amount of sales returns, the timing and level of markdowns and other
competitive factors.
7
Results of Operations
The following table sets forth, for the periods indicated, selected statement of
operations data expressed as a percentage of net sales and the number of stores
open at the end of each such period:
Three months ended Six months ended
June 30, June 30,
------------------------------- -------------------------------
2002 2001 2002 2001
-------------- -------------- ------------- -------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 63.0% 63.0% 63.0% 63.1%
-------------- -------------- ------------- -------------
Gross margin 37.0% 37.0% 37.0% 36.9%
Selling, general and administrative expenses 35.6% 36.8% 35.0% 36.0%
Store pre-opening expenses 0.4% 0.5% 0.6% 1.1%
-------------- -------------- ------------- -------------
Income (loss) from operations 1.0% (0.3)% 1.4% (0.2)%
Net interest expense (income) (0.2)% 0.2% (0.1)% 0.2%
-------------- -------------- ------------- -------------
Income (loss) before income taxes 1.2% (0.5)% 1.5% (0.4)%
Income tax expense (benefit) 0.5% (0.2)% 0.6% (0.2)%
-------------- -------------- ------------- -------------
Net income (loss) 0.7% (0.3)% 0.9% (0.2)%
============== ============== ============= =============
Number of stores open at end of period 65 55
8
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001
Net Sales. Net sales increased $15.7 million, or 23.4%, to $82.9 million
in the three months ended June 30, 2002 from $67.1 million in the comparable
2001 period. This increase resulted from (i) net sales of $3.1 million from four
new stores opened in 2002, (ii) net sales of $6.1 million from stores opened in
2001 not included in the comparable store base, and (iii) a comparable store
sales increase of $6.5 million, or 10%. Stores are added to the comparable store
base at the beginning of the fourteenth full month of operation.
Gross Margin. Cost of sales is net sales minus the cost of merchandise
and certain distribution and purchasing costs. The gross margin was 37.0% of net
sales in both the three month periods ended June 30, 2002 and June 30, 2001.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include (a) direct store level expenses, including rent
and related operating costs, payroll, advertising, depreciation and other direct
costs, and (b) corporate level costs not directly associated with or allocable
to cost of sales including executive salaries, accounting and finance, corporate
information systems, office facilities and other corporate expenses. Selling,
general and administrative expenses increased $4.8 million, or 19.4%, in the
three months ended June 30, 2002 to $29.5 million from $24.7 million in the
three months ended June 30, 2001. Of the increase, $4.1 million was attributable
to the stores opened in 2002 which were not open during 2001 and the stores
opened in 2001 not in the comparable store base. Of the remainder, $500,000 is
due to increases in the comparable stores and $200,000 is attributable to the
increase in corporate costs to support the growth of the Company. As a
percentage of sales, selling, general and administrative costs decreased to
35.6% of net sales in the three months ended June 30, 2002 from 36.8% of net
sales in the three months ended June 30, 2001. This decrease is primarily due to
leveraging store and central costs over a greater sales base.
Store Pre-Opening Expenses. The Company expenses store pre-opening
expenses as incurred. Pre-opening expense for the two new stores opened in the
second quarter of 2002 and the two new stores which opened in July amounted to
$384,000. In the second quarter of 2001, the Company incurred store pre-opening
costs of $374,000 related to the two stores opened in that quarter, one store
which opened in July and one store which was relocated.
Net Interest Expense (Income). In the second quarter of 2002, the
Company had net interest income of $187,000 compared with interest expense of
$149,000 in 2001. The change is due to interest earned from the proceeds of the
Company's sale of shares in March 2002.
Income Taxes. The Company's effective income tax rate was 40.7% for the
second quarter ended June 30, 2002 and 38.0% for the second quarter ended June
30, 2001. The increase in the effective tax rate is the result of additional
state income taxes on the higher level of income.
9
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001.
Net Sales. Net sales increased $35.2 million, or 26.3%, to $168.7
million in the six months ended June 30, 2002 from $133.6 million in the
comparable 2001 period. This increase resulted from (i) net sales of $4.8
million from four new stores opened in 2002, (ii) net sales of $14.9 million
from stores opened in 2001 not included in the comparable store base, and (iii)
a comparable store sales increase of $15.5 million, or 12%.
Gross Margin. The gross margin increased to 37.0% of net sales in the
six months ended June 30, 2002 from 36.9% in the six months ended June 30, 2001.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $10.9 million, or 22.7% in the six months
ended June 30, 2002 to $59.1 million from $48.2 million in the six months ended
June 30, 2001. Of the increase, $7.9 million was attributable to the stores
opened in 2002 which were not open during 2001 and the stores opened in 2001 not
in the comparable store base. Of the remainder, $2.1 million is due to increases
in the comparable stores and $900,000 is attributable to the increase in
corporate costs to support the growth of the Company. As a percentage of sales,
selling, general and administrative costs decreased to 35.0% of net sales in the
six months ended June 30, 2002 from 36.0% of net sales in the six months ended
June 30, 2001. This decrease is primarily due to leveraging store and central
costs over a greater sales base.
Store Pre-Opening Expenses. Pre-opening expense for the four new stores
opened in the first half of 2002 and the two stores which opened in July
amounted to $1.0 million. In the first six months of 2001 the Company opened
five new stores and relocated two stores and incurred pre-opening expenses of
$1.4 million.
Net Interest Expense (Income). In the first six months of 2002 the
Company had net interest income of $176,000 compared with interest expense of
$181,000 in 2001. The change is due to interest earned from the proceeds of the
Company's sale of shares in March, 2002.
Income Taxes. The Company's effective income tax rate was 39.8% for the
six months ended June 30, 2002 and 38.0% for the six months ended June 30, 2001.
The increase in the effective tax rate is the result of additional state income
taxes on the higher level of income.
Liquidity and Capital Resources
Our cash is used primarily for working capital to support inventory
requirements and capital expenditures, pre-opening costs and beginning inventory
for new stores. In recent years, we have financed our operations and new store
openings primarily with cash from operations, the net proceeds we received from
our initial public offering in 1997 and with borrowing under bank financing
agreements. In March 2002 we completed a secondary offering in which we sold
1,750,000 new shares, with net cash proceeds of $52,130,000.
At June 30, 2002 and December 31, 2001 our working capital was $108.8
million and $56.4 million, respectively. Cash used in operations was $11.3
million for the six months ended June 30, 2002 as a result of an increase in
inventory of $8.8 million to support the new stores, the seasonal reduction of
accounts payable and accrued payroll in the amount of $2.9 million and a
reduction in income taxes payable of $3.7 million.
10
Net cash used in investing activities during the six months ended June
30, 2002 was $5.0 million. This use of cash was for capital expenditures,
primarily related to new stores. In 2002, we expect to spend approximately $11.0
million on capital expenditures, which includes approximately $8.0 million for
new store openings, and the remainder for remodeling existing stores, upgrading
systems in existing stores, warehouse equipment and corporate systems
development.
We are currently negotiating to build a new distribution center and
office complex which we plan to open in 2004. We anticipate that this new
facility, which will be located near our existing distribution center, will be
800,000 square feet for distribution plus 30,000 square feet of office space.
The total cost of the land and building for this facility is expected to be
financed by long-term debt. We will use our working capital to pay for systems
and equipment.
Net cash provided by financing activities includes the $52.1 million
proceeds from the sale of shares.
On July 11, 2002 the Company signed a new $25 million one year line of
credit agreement with First Union National Bank. With the successful completion
of the sales of shares in March, 2002, the Company no longer required the
existing $50 million revolving credit agreement which contained several
restrictive covenants and was far more expensive to maintain. Borrowing under
this new line will bear interest at LIBOR plus 125 basis points. The Company
believes the cash generated from operations during the year and available
borrowings under the new financing agreement will be sufficient to finance its
working capital and capital expenditures requirements for at least the next 12
months.
General
On June 25, 2002, our Board of Directors approved a two-for-one stock
split to shareholders of record as of the close of business on July 15, 2002,
payable on July 31, 2002.
Critical Accounting Policies
Financial Reporting Release No. 60, recently issued by the Securities
and Exchange Commission, requires all registrants to discuss "critical"
accounting policies or methods used in the preparation of financial statements.
Our critical accounting policies relate to merchandise inventories. We value our
inventories at stores at the lower of cost or market as determined using the
retail inventory method. Because we do not have perpetual inventory records for
inventory in our stores, we perform complete physical inventories in each of our
stores at the end of each year. The actual physical count of merchandise is made
principally by third party inventory counting service firms. We believe our
process results in reasonable estimates of our retail inventory on hand at year
end.
Inventory valuation methods also require certain management estimates
and judgments. These include estimates of net realizable value on product
designated for clearance or on slow moving merchandise. The accuracy of our
estimates can be affected by many factors, some of which are outside of our
control, including changes in economic conditions and consumer buying trends.
Historically, we have not experienced significant differences in our estimates
of recovery compared with actual results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
11
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on May 16, 2002. At
the meeting, shareholders voted on the following:
1. To elect two Class C directors to hold office for a term of three
years until their successors are duly elected and qualified.
2. To approve the adoption of the 2002 Stock Option Plan.
3. To ratify the appointment of PricewaterhouseCoopers LLP as the
Company's independent auditors for the fiscal year ending
December 31, 2002.
The results of the voting was as follows:
Withhold
For Against Abstain Authority
--------- --------- -------- ---------
Richard Lesser 8,375,270 -- -- 313,404
Patricia A. Parker 8,288,324 -- -- 400,350
Approval of 2002 Stock Option Plan 5,160,391 2,516,485 6,909 --
Ratification of PricewaterhouseCoopers LLP 8,541,715 146,280 679 --
The term of office for each of the following directors continued after
the meeting: William Kaplan, John E. (Jack) Parker, Richard J. Bauer and Richard
J. Drake.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
(b) There were no reports on Form 8-K filed during the quarter
ended June 30, 2002.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
A.C. MOORE ARTS & CRAFTS, INC.
Date: August 9, 2002 By: /s/ Leslie H. Gordon
-------------------------------
Executive Vice President
and Chief Financial Officer
(duly authorized officer
and principal financial
officer)
13